Learning about money is important for kids, and as parents, we have an obligation to teach them good money habits. What they learn when they are young will have a tremendous impact on their financial lives as adults. Kids are very observant. They will watch how we interact with money and draw conclusions from it, but having the right conversations with them will help them build context and understanding so they can make good financial choices throughout their lives.
So, how and when should you talk to your kids about money?
The Early Years
Even as preschoolers, children are aware of money. They go to the store with you and see things they want. They watch you pay for groceries with cash, checks or credit cards. They find pennies or quarters laying around the house. This is a good age to explain that money is used to buy things we need or want. Help them count coins and sort them into like sets. Set limits on buying things when you go to the store. When they beg for an unbudgeted toy, say things like “we’ll have to save a little more money before we can buy that”. It helps set the stage for more in-depth conversations later. Remember, they are watching you and will make mental notes of everything you buy in their presence.
Every kid should have a clear glass jar “piggy bank” by the time they enter kindergarten. Instead of calling it a piggy bank, call it a savings jar. Using these words helps them connect money with an appropriate action.
Start the jar with a few coins and talk about adding money to it and watching it get full. They could earn money by helping to do the dishes or feed the dog. Household chores teach kids to work for their pay. That pay gets put in the clear glass jar, and that money that can be used to buy things they want at the store.
During the late elementary-early middle school years, talk about saving for specific purposes. You can establish rules for what happens to the money once their jar is full. The 50-25-25 rule is a great place to start. 50% of the money can be spent on immediate needs, 25% gets saved for a big item like a video game set or a car later on, and 25% gets saved for the long haul (and investing later). There’s also the option of designating a percentage to a charity of choice. Give them some control over how their money gets saved and spent.
These tween years are also a good time to talk to your kids about your monthly bills like the electric and water bills. You can even show them how much of your paycheck goes toward paying the monthly bills. This adds a dose of reality to the money game. Challenge them to help you reduce the costs of the electric or water bill over a period of a few months, then split the savings with them so they can add to their savings jar.
Middle School and Tweens
By middle school age, it’s time to take 25% (or more) of the savings jar contents to the bank and open a savings account. Here’s your chance to explain that the bank pays money (interest) to hold their money. It’s also a good time to begin talking about saving money for college. Financial advisor Suze Orman says, “no parent should pay for their kids’ college”, but that’s a personal choice you will need to make. You could make a deal with your child to match 20% of everything s/he saves, as incentive for boosting their savings. You provide all their necessities, but make them save for things they want.
Ah, the Teens
By the time your kids hit those turbulent teen years, a part-time job and a checking account make sense. Working – even if it’s at home or around the neighborhood – helps them understand the value of money. Having a checking account also gives them some control over their money and helps them see it come in and go out as they make and spend it. Most checking accounts come with an ATM/debit card, so be sure to talk about security of your finances and how to keep your PIN, debit card and identity safe. There are some great tips at DebitSavvy.com.
One day your kids will ask you, “Are we rich?” or, “Is so-and-so rich?” That is the time to challenge their assumptions about money and wealth. Ask them, “What does it mean to be rich?”, “Does rich make you happy?”, “How do people get rich?” Conversations like these help kids think more deeply about money and how it relates to life in general, setting the stage for how they think about and interact with money in the future.
I’ve seen kids who had everything given to them on a platter continue to ask mom and dad for money well into their 50’s, completely unable to manage their own finances. I’ve seen kids who grew up in poverty give everything they own away to others out of sheer selflessness. Somewhere in between is probably a good place for most of us.
My son never wanted for anything, but he was a miser and finished college with money in the bank and a generous heart that led him to support several charities even as a teenager. That’s a good way to begin adulthood.
Support your children with necessities but help them understand the value of money through conversation and coaching, working and saving. Remember, your words are important, but your actions speak volumes. More than anything you say, your children will learn by watching how you interact with your own money.
What financial story are your actions telling them?